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When you’re getting ready for the first year of your freelance business, one of the most intimidating factors is how to manage money. But with these tips, you’ll be equipped to start your business off with the right financial focus.
Set up a bookkeeping system right away
Before any money comes in, create a system for managing it. Tracking invoices and expenses early on will help you create financial reports and file your taxes later. It also keeps important things, like invoices and receipts, from falling through the cracks.
Rather than setting up a spreadsheet, invest in software or use a money management app that tracks your finances. There are both free and paid options that can provide what you need. A few good examples include:
- GoDaddy’s Online Bookkeeping
- Wave apps
Create separate business accounts
Many new freelancers start out as sole proprietors, meaning they are the only person who owns and operates their business. Because of this, it’s easy to mix personal and business expenses — but don’t.
Avoid this trap by setting up a separate checking account and credit card that you use for your business only. This keeps your financials organized and prevents you from tapping into business funds for personal use and vice versa.
Pay yourself a set amount on a set date
To further ensure your finances are kept separate, make a plan to deposit funds from your business account into your personal account on a set date for a set amount — just like a regular payday.
When you have a set payment schedule (biweekly, monthly or whatever schedule works for you), you even out your income. For example, if you pay yourself $4,000 every month and one month your freelance business brings in $5,000 and the next month it brings in only $3,000, your personal income will not fluctuate.
Make a list of expected expenses
Before you create an income plan, create two expense lists: recurring monthly expenses for personal needs and projected business expenses. This allows you to see how much money you need to make to maintain your current lifestyle and run your business, and will help guide you as you design your income plan.
Create an income plan
To figure out how much money you need to make, create an income plan.
1. Create a list of what you will provide to produce revenue. That may be a combination of:
- Retainer-based services where clients pay a set amount each month.
- Project-based services where clients pay a flat rate for a specific service.
- Hourly-rate services where clients pay depending on the amount of time you put into the project.
- Products that are provided for a set rate.
2. Add pricing to each of the income-producing offerings you will provide.
3. Set an amount of income you would like to make per month.
4. Work backward to determine out how much work you must do or how many products you must sell to make your desired level of income. Also, subtract your expenses from your projected revenue to get a full look at the income that will actually be coming to you.
This activity may make you realize that you need to increase your prices to meet the desired level of income you want to bring in.
Pro tip: Try to create an income plan that includes multiple revenue streams, such as two retainer clients, three hourly rate clients and 30 product sales per month. When you have income streams from a variety of sources, you are less reliant on one client or project as your sole source of financial stability.
Factor in your taxes
Once you have a projected income for the year, estimate the amount of taxes you will need to pay.
As a freelancer, you no longer have an employer who pays a portion of your taxes or who removes taxes from your paycheck. So you must familarize yourself with self-employment taxes and create a payment plan early on.
1. Talk to an accountant. If you are a full-time freelancer, talk to a financial professional early to plan for and prepare your taxes.
2. Start paying estimated taxes. Your accountant will consider your finances and create a quarterly tax payment plan. This allows you to spread out your tax payments and potentially avoid a fine at the end of the year.
3. Plan to pay 30 percent of your income to taxes. You may end up paying less. But it’s better to have more money set aside than not enough.
Once you consider your taxes, you may find that you need to adjust your income plan.
Make it easy for clients to pay you
Once you have all of your financial planning in order, it’s time to start bringing in the revenue. And when you do, make the payment process simple for your clients so you get paid for your freelance work as soon as possible. You can do that by following these simple steps:
1. Create a contract. Make all clients sign a contract that lists:
- The cost of the project.
- When payment is due.
- What happens if the client doesn’t pay. (Consider adding a fee per day or week for late payments and including a clause that outlines any legal ramifications clients may face if they don’t pay.)
2. Use a merchant account that allows clients to pay directly through your invoicing software. This makes payment easy for your client, helps you avoid “check in the mail” situations, and ensures funds are deposited quickly into your account.
3. Set up recurring payments. If a client is on a retainer or has multiple payments set up, use a system that automatically bills or charges them.
4. Establish a follow-up system for late payments. Don’t be shy when it comes to requesting payment. Reach out to clients when their payments are past due.
Now you know how to manage money as a freelancer
Finances can be a scary piece of the puzzle your first year running a freelance business. But with the right planning, knowledge, tools and team, you can take control from the start and set yourself up for success.
Want more tips on starting your freelance business? Check out the 11 things you must do before you start your freelance business.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.